Minimum wage hike: The costs are higher than you think

The California minimum wage increase has been approved. The minimum wage will rise by $1 per hour through 2022, up to $15. There are significant costs to employers, both public and private, besides the $5-per-hour increase. Inflation is one of those costs.

Let’s look at the real results and implications of what our elected officials have done to us and for themselves on many levels. And let’s find the unintended consequences. Those include additional payroll taxes and raises for non-minimum wage employees.

Cities like San Francisco, Los Angeles, and Seattle have enacted the $15 limit. In each case, businesses have closed, and jobs have been lost.

The results will include the shuttering of businesses, loss of jobs due to costs, the elimination of employment due to the relative cost of automation, a severe decline in California’s manufacturing competitiveness, and it will encourage employers to leave the state.

Minimum wage proponents have good intentions, but they pave the way to hold back many workers and cost the jobs of many others.

The minimum wage in the United States is $7.25. As of 2013, only 19 states plus the District of Columbia had enacted minimum wages higher than the U.S. standard. Since then, cities like San Francisco, Los Angeles, and Seattle have enacted the $15 limit. In each case, businesses have closed, and jobs have been lost.

The Founding Fathers designed a system where the states function as laboratories and examples for each other. No one said they had to be good examples. And it appears that California and its sister state New York, which also passed a $15 minimum wage, will set bad examples.

Employers’ costs are more than you think
Besides the increase in pay, employees will pay increased taxes and employer increased matching and employer deductions. Most employers have a “burden” — that is, costs in addition to payroll — of 28%. These costs include matching the social security contribution, state disability, unemployment and a host of others. As hourly wages increase, so does the dollar amount of the burden.

After the increase over five years,  the cost will be $15 per hour plus $4.20 per hour in burden, or $19.20 per hour — some $6.40 per hour more than now.

Where most people see an increase in wages less taxes, employers see increased wages, PLUS the burden.

So for the minimum-wage employee, the current cost to employers is $10 per hour plus $2.80 per hour of burden, or $12.80 total.

After the increase over five years,  the cost will be $15 per hour plus $4.20 per hour in burden, or $19.20 per hour — some $6.40 per hour more than now. This reflects a real 150% increase in labor costs, when one compares the $7.25 national minimum wage now with the $19.20 per hour in 2022.

And those costs here do not include increased the costs of workers’ compensation insurance, which is based upon payroll.

It is evident this increase will be a boon to state and federal governments, who will gain fealty from increased taxes coming from minimum wage workers and their employers.

“I’m calling this measurement the RVPR – or the “Relative Value Pay Rate.”

Relative value of non minimum-wage employees
But minimum-wage earners are clearly not the only pay level that will change. Besides the additional cost of salaries for minimum-wage employees, there are likely to be increases for other workers as well. Employees who now make more than minimum-wage people at their company will need to have raises as well.

The relative value of an employee – whether perceived by the individual employee, or by his peers or family, can be measured in his or her pay rate as compared to the minimum wage.

I’m calling this measurement the RVPR – or the “Relative Value Pay Rate.”

What will happen is that people who now make $20 per hour compared to the $10 minimum wage will feel the necessity to make $30 per hour, so they are still worth double the minimum wage.

And since neither the job duties of the minimum-wage earner nor of the higher-wage earner are likely to change, the pay rate must. And don’t forget about the 28% increased burden.

This single factor – the Relative Value Pay Rate — is going to become a huge cost for employers, as all other employees are going to demand pay increases commensurate with their relative values.

Whether this results in greater purchasing power or a higher standard of living for minimum wage workers is an open question. And it’s one the government either hasn’t considered or is not discussing.

The full-time minimum-wage earner today earns $20,800, and will earn $31,200 (both before taxes) later, as compared with today’s federal poverty level of $24,300. But it does not contemplate the natural increase in the poverty level that likely will take place as the inevitable price inflation occurs.

The state increases its own costs
Not only will these increases impact private employers, but also imagine the state’s payroll increases as the public employee unions negotiate RVPR raises for their state employee members and all other state workers. These increases will flow through to all government workers, not only state employees, and include employees of school districts, special districts (like fire and water), cities and counties and in the end taxpayers.

Manufacturing will Become uncompetitive
Manufacturing costs in California are already among the highest in the nation. Manufacturing companies have already been driven out by high taxes, significant regulatory overreach by Cal/EPA and others, a greater than average cost of employment litigation, and a host of other expenses that make states like Texas, Nevada and Arizona look good.

This wage increase will accomplish one major thing: It will make California’s manufacturer’s prices higher than their competitors in other states. As a result, it will force manufacturers to eliminate jobs, cut safety, automate or the least expensive choice: leave the state.

Other Unintended Consequences
FOOD: The cost of food in the supermarket will increase for all citizens as all of the costs of producing and delivering it increase. A bill currently in the Legislature would end certain labor exceptions for farm workers. You can expect farm mechanization wherever possible.

INSURANCE: We must not exclude workers’ comp premiums, which are based upon payroll and increase in direct proportion to payroll across industries. Those will adjust over time, but consider that with increased earnings the costs of both temporary and permanent disability will rise. All of the other service costs will rise, as the costs of everything from underwriting to medical services experience payroll increases.

INCREASED UNEMPLOYMENT: Minimum wage jobs are frequently learning jobs for the young. But first jobs for high schoolers and college kids, such as in fast food or intern-type positions, are likely to disappear. In Europe,the unemployment rate for people 26 and under is nearing 30% as a result of employment laws that employers cannot live with. Jobs for seniors who supplement their social security will disappear and more will fall into poverty.

AUTOMATION: Automation will replace a lot of jobs with kiosks. We are seeing it in the airports at airlines and even car rental agencies. McDonalds has installed 7,000 “touch screen cashiers” and is trying them out in stores in Phoenix. It something to consider when one realizes that they don’t get overtime, breaks and can’t sue for a host of California employment laws and regulations that are already broader and more invasive than other states.

WELFARE: In a state where working the system has become an art form, higher wages decrease eligibility for welfare benefits and subsidies for food stamps, child care, and rent. In Seattle and other towns where similar wage increases have occurred, workers are requesting fewer hours in order not to lose their welfare. Welfare caseloads have not decreased.

It is clear that California will see many changes as the result of its enactment of the new minimum wage. Let’s hope the Founders were as prescient as they appear to be. And let’s hope the state can survive.

Note: J Dale Debber, an award-winning journalist, is publisher of the Workers’ Comp Executive and Cal-OSHA Reporter newsletters, and is a 40-year California businessman.